Texas Oil and Gas Attorney Blog

This blog recently discussed the increase in U.S. (and Texas) oil and gas production, and that it has shown few signs of slowing down in the near future. In August 2013, the American Petroleum Institute’s monthly production statistics showed that U.S. oil production was at a 25 year high at nearly 7.6 million barrels a day. This is 20.3% higher than just one year earlier. Much of this remarkable increase is due to advances in technology that allow previously unattainable resources to be tapped–technology such as hydraulic fracturing and horizontal drilling.

API’s chief economist, John Felmy, said: “August 2013 saw a continuation of trends that have been building for quite some time. The incredible rise in American energy production, helped in part by softening demand, has allowed the U.S. to dramatically increase energy exports and reduce its energy imports.” Stocks of crude oil were also high, at 361.6 million barrels in August , which is the second highest level for the end of August in 23 years. Gasoline stocks rose 8.7% compared to August a year ago.

Helping At Home

One oil company active in Texas, Paradigm Oil and Gas Inc., is planning to identify oil wells that can be made more profitable by using advanced technology. Paradigm announced recently that it is ramping up for what it calls a “Production Blitz” in the face of continued conflict in the Middle East. In this “Production Blitz” scheme, Paradigm wants to increase production quickly in the face of growing demand due to instability in oil rich conflict zones. In light of the conflict in Syria, oil supply disruptions in Libya and continued instability in Egypt, Paradigm believes oil prices will remain at above $100 per barrel for the foreseeable future and plans to capitalize on these shortages from the Middle East by bringing more wells into production and shipping oil while the prices are high.

After spending July and August doing a comprehensive survey of its oil and gas wells and assets in Texas, Louisiana, and Oklahoma, the planned production blitz will mobilize personnel and available resources. The company has 23 leases with nearly 200 wells in these three states. Most wells are ready to be worked on, since they were previously acquired by Paradigm. Vincent Vellardita, the president and CEO of Paradigm, said, “We have set one goal for theses leases, get them online and producing!” Paradigm did not give an estimate of their oil reserves or specific production expectations, but in August a Paradigm supervisor described their production in the state of Oklahoma as “booming”.

The “blitz” will work by deploying quick response teams to cover multiple lease sites, commencing in September, 2013. Within ten days of announcing the plan, Paradigm committed to having three wells online in different leases already producing revenue for the company. Most of the leases only require small repairs and maintenance to things like pumps, production lines, etc, to be fully online and do not need significant maintenance to keep them producing. A few wells will require more extensive repairs.

This year there has been a nearly continuous stream of good news about shale development in Texas and its positive effect on the economy in our area. In March 2013, the University of Texas at San Antonio’s Center for Community Business and Research issued its annual report on the Eagle Ford shale and its impact in south Texas.

The report stated that the Eagle Ford has resulted in more than $61 billion added to the Texas economy in 2012, and supported 116,000 full time jobs in the oil and gas sector. This is an impressive jump from the previous year, when the previous report from the Center at UTSA found that the Eagle Ford had contributed $25 billion and supported 47,000 full time jobs in 2011. For long term growth, the researchers expect $89 billion in growth annually and 127,000 jobs added by 2022.

This year, UTSA’s report was based on information from 14 oil and gas producing counties as well as six counties that are used as staging areas for the oil and gas sector. In these areas, home sales and home values have risen sharply. The manager of a home development company south of San Antonio said that two-thirds of their business comes from people relocating to work in Eagle Ford shale jobs. Hotels have also seen a big boom in business all around the area, with four new hotels opening in just 18 months.

The Bipartisan Policy Center published a study in May 2013 about the U.S. gas market and its supplies, entitled “New Dynamics of the U.S. Natural Gas Market”. This interesting research was part of the New Dynamics of Natural Gas Supply and Demand project. This project looks at new gas supplies in the U.S. and methods to improve the economic and environmental impacts of the energy industry. This current work builds on past reports on shale gas and on ensuring the stability of natural gas markets.

Specifically, the study looked at the potential impact of increased use of natural gas, taking into account various assumptions about future natural gas supplies. It examined increasing demand for natural gas from sources like industry and power stations as they replace coal with gas. The report concentrated on two main issues: 1) the price impact when multiple demand drivers increase demand at the same time; and 2) how the impacts would vary with either high or low gas production output. Even when the demand for natural gas rises in several areas, the report found that natural gas prices were unlikely to rise significantly. In other words, even when the supply is low and the demand is high, the peak prices of gas that were seen in past years would not be reached again. Significant increases in gas exports from the U.S. are also not likely to increase prices.

The report determined that most of the growth in natural gas will be driven primarily by economic growth combined with the switch from coal to gas for power plants and industrial use. The report also stated that natural gas vehicles will likely continue to get more popular and may make great gains in the market by the year 2035. The report also concluded that the United States is in a favorable and unique position to take advantage of various factors, including the environmental, energy and economic security benefits that our country’s natural gas reserves allow. Natural gas can improve both the energy and environment sectors, while promoting a growing economy and more jobs.

Experts at the Bipartisan Policy Center held a conference in June 2013 and as part of that conference concluded that U.S. oil and gas exploration and production can reshape global energy geopolitics. The chairman of IHS Cambridge Research Associates, Daniel Yergin, said that “(a) better supplied world is a safer world, but it doesn’t mean there still aren’t above-ground and below-ground risks. It could help us play a leadership position in the world that wouldn’t have been possible a decade ago, however.” Government officials at the conference were likewise optimistic, asserting that more oil resources can help the economy and business interests and influence the world. A U.S. State Department special envoy, Carlos Pasqual, said, “(i)f we manage it with environmental responsibility, it will be historic.

In terms of the relationship between U.S. military action and oil supplies, Luis Giusti from the Center for Strategic and International Studies told the conference not to expect the U.S. to defend oil producing counties abroad. Mr. Giusti said this kind of military action would make the markets very volatile.

Mr. Yergin, Mr. Pasqual and Mr. Giusti all agreed that the increase in U.S. oil production gives our country more clout in dealing with other countries. An example that Mr. Pasqual gave is the government’s ability to persuade countries not to buy Iranian crude oil or to buy less of it. He noted, “Countries understand the need to restrain Iran’s nuclear ambitions. They’re likelier to do something about it if they’re confident they can buy the oil elsewhere.” He also stated that “(i)f we can help Asia diversify its gas supplies, its positive influence on global markets will be important.”

The Texas oil and gas industry has had a busy year. In June 2013 Kinder Morgan Energy Partners announced it was expanding its pipeline system into the Eagle Ford shale in Karnes County, Texas. This new pipeline project is the result of a long term contract with ConocoPhillips and will extend the already existing 178 mile pipeline another 31 miles from DeWitt County to ConocoPhillips distribution facility in Karnes County. Kinder Morgan also plans to build holding tanks and a truck unloading facility at ConocoPhillip’s site in Karnes County. The project began construction in July 2013 and the new section is expected to be operational by the third quarter of 2014, with a capacity of 300,000 b/d of crude and condensates.

This news follows on Kinder Morgan’s announcement in May 2013 that it was expanding another pipeline to its refinery in Brazoria County. The original pipeline, part of the same pipeline system described above, went into service in June 2012 and brings Eagle Ford oil to Houston. That pipeline expansion is expected to start service by the end of 2013 and will increase the capacity to 100,000 b/d. Kinder Morgan indicated that it plans, as part of this project announced in May, to add new pumps and a storage tank in Wharton County, Texas, and offloading capabilities for trucks in DeWitt County.

In July, Exco Resources Inc. announced it was buying undeveloped oil and gas assets in Eagle Ford and also in the Haynesville shale from Chesapeake Energy Corporation. The purchased assets are located in Zavala, Dimmit, La Salle, and Frio counties in Texas, as well as some in Louisiana. Exco paid Chesapeake a total of $1 billion for these oil and gas assets.

A new gas pipeline is planned through Texas to bring natural gas to the Gulf coast. Two companies, Kinder Morgan and MarkWest Utica EMG, have entered a joint venture for a 1,100 mile gas pipeline and to develop a fractionation plant on the Gulf coast. The facility and pipeline will process and transport liquid natural gas from the Utica and Marcellus shales in Ohio, Pennsylvania, and West Virginia.

Kinder Morgan’s CEO Richard Kinder issued a statement that “(t)he combination of Kinder Morgan’s strategically located and existing pipeline assets that traverse through the heart of the Utica and Marcellus shale plays, along with MarkWest’s existing and significant midstream footprint throughout the Utica and Marcellus shale plays, should provide significant growth opportunities for the (joint venture).”

A gas complex is planned to be built in Tuscarawas County, Ohio. The complex, on a 220 acre piece of land for which Kinder Morgan has an option, will have a 400 million-cubic-foot-per-day (MMcf/d) cryogenic processing facility. It can be expanded to accommodate one billion cubic feet per day. The first processing plant is expected to be completed by the fourth quarter of 2014. The companies are also exploring options to increase fractionation capacity in the Gulf region. MarkWest is planning to install a de-ethanization plant in its Seneca complex as well, after starting up a de-ethanization plant in Houston, Pennsylvania in July 2013. MarkWest is also expanding a gas processing plant at Mobley in West Virginia, as well as expanding at other facilities in Pennsylvania and West Virginia.

Recently, Chevron‘s Chief Executive Officer John S. Watson spoke at the Center for Strategic and International Studies and addressed the issue of whether the current boom in the oil and gas industry could serve as an opportunity for sensible energy policy reforms by the federal government. His suggestions included reforming the federal tax code, increasing access to public lands, and more rational environmental policies.

In terms of environmental policies, Mr. Watson pointed out that these policies must be transparent and honest, discussing the controversial Renewable Fuel Standard which currently requires biofuels that can’t yet be produced. As far as the future of biofuels, he told the CSIS that, “We haven’t cracked the code yet, but we’re working on it. Renewables have their place, and they will grow. But right now, $500 billion of subsidies support them around the world. We have to make them affordable.” Mr. Watson also touched on carbon emissions on an international level, saying that wealthier economies might withstand the higher prices from carbon taxes by increasing efficiency, but this will not work with emerging economies, noting “[g]overnments want to feed and shelter their people, so their carbon use will grow.”

Mr. Watson also spoke optimistically about the energy industry as a whole, on a global scale. He said that right now, there are unprecedented opportunities to produce many different kinds of energy products, but it was crucial to have appropriate commercial terms and physical security. He said that Chevron’s key to working in countries around the world, in some cases for many decades, is sensitivity to the host government and to each country’s needs. He praised American companies like Chevron who are exploring and producing around the world, for their advanced technology and skills, but also for American values that Chevron tries to embody, such as environmental awareness, respect for the rule of law and transparency.

The US Department of Interior’s Bureau of Land Management proposed new regulation for drilling on federal or Indian land. The BLM actually already amended the proposed regulation once, after there was serious criticism of their impact. To evaluate the amended proposal, the Independent Petroleum Association of America and Western Energy Alliance commissioned a study on the topic by John Dunham and Associates, an economic consulting firm based in New York City.

Under the original proposal of last year, oil and gas producers would have to pay an additional $1.284 billion in costs. Changes were made to that proposed regulation after producers, manufacturers, state regulators, and others adversely impacted by the regulation change lobbied the BLM to fix the problems. The major changes included: elimination of the requirement that all well simulations undergo the full requirements; elimination of the requirement that all oil and gas well development must be applied for through the BLM before completing a well; modification of the requirement for cement logs on all wells; and substantial changes to administrative reporting and permitting. The comment on the amended regulation closed in August 2013.

Under the amended proposal, according to JDA, oil and gas producers would still have to pay $345 million more per year. JDA noted in the study that the costs of the regulations clearly exceed $100 million, at which point an economic assessment is required by law, and this has never been done. JDA calls the $345 million a “best case scenario” number, that is, in the event that BLM approves 100 percent of applications and capital costs are only 7%. Per well, JDA expects the cost of the revised proposed regulation to be $96,913. These numbers are certainly not nominal or inconsequential to the industry, and independent producers will be the hardest hit.